L15: Real Estate Markets And Analysis

Question 1

Physical characteristics of land (3)

Answer 1

1) indestructibility (it is a long-term investment unlikely to depreciate)
2) immobility
3) non-homogeneity

Question 2

Economic characteristics of land (5)

Answer 2

1) scarcity (informs economic principle of supply and demand)
2) situs (location and economic significance/quality of area)
3) modification (value of land can be affected by human made changes)
4) fixity (fixed location and cannot be moved)
5) illiquidity (relative difficulty of convert an asset to cash without loss of value)

Question 3

Demand factors (7)

Answer 3

1. Price (more expensive real estate has less demand because of smaller pool)
2. Income (decrease in salary = decrease in demand for housing)
3. Employers (new employers in an area increases demand)
4. Position and household composition (more people = higher demands)
5. Consumer preferences
6. Availability of mortgage credit (more loan = more demand)
7. Expectations on near future

NB: an increase in cost of construction, financing & land value leads to an increase in real estate prices

Question 4

Supply factor (3)

Answer 4

1. Price (if market is pushing price is higher, more people are willing to sell, which leads to an increase in supply)
2. Cost of production (lower cost to build = increase in supply)
3. Expectations on the near future

Question 5

Supply & demand

Answer 5

Supply = amount of a product or service available at a given time

Demand = measure of general desire of an asset or commodity at a given time

High demand = low supply = high prices
Low demand = high supply = low prices

Supply of money high = low interest rate for loans = high demand for house
Supply of money low = high interest rate for loans = low demand for house

Question 6

Equilibrium on supply & demand

Answer 6

Equilibrium = the point at which supply and demand curves cross

Question 7

Months of supply

Answer 7

How long a list and will sit on average before being sold

Formula = number of houses in market/number of houses sold in a month

Question 8

Government bodies that have an impact on real estate supply and demand

Answer 8

- local zoning
– local permanent of new development
- building codes
– federal insurance on interest rate
- environmental regulations
– local taxing power

Question 9

Major Phases of Real Estate Market Cycle

1/4

Answer 9

1) RECOVERY
- follows recession
- conditions are stabilizing and starting to look better

Characteristics:

• high unemployment
• lots of foreclosure
• people are afraid to buy homes
• government lowers interest rate to encourage investments

Question 10

Major Phases of Real Estate Market Cycle

2/4

Answer 10

2) EXPANSION
- market activity picks up
– real estate is seen as a good investment

Characteristics:

• most properties are bought or rented
• rent and home prices are rising
• construction for new spaces start
• end of the phase people are paying above

Question 11

Major Phases of Real Estate Market Cycle

3/4

Answer 11

3) HYPER SUPPLY
- supply catches and surpasses demand
– first warning signs: increase in vacancy/unsold property

Characteristics:

• crazy high prices and rise in vacancies
• lots of building projects going on

Question 12

Major Phases of Real Estate Market Cycle

4/4

Answer 12

4) RECESSION
- economic activity declines & remains for a minimum six months
– occupancy falls below average, homes sit on the market
– prices are driven down & foreclosures increase

Characteristics:

• high unemployment
• decrease spending by consumer and businesses
• less investment
• land prices are at their lowest
• decreased interest rates

NB: tends to be caused by economic shock or a bubble burst

Question 13

(4) National economic indicators

Answer 13

1) The Housing affordability index
Compares median household income needed to purchase median-priced home
*100+ = purchase with 20/80 is possible 100-= not possible

2) Exchange rate
Depreciating currency = high inflation risk

3) Gross domestic product
Strong GDP can indicate future inflation

4) Inflation
General rise in prices leads to decrease in purchase power

Question 14

Local market indicators (3)

Answer 14

1) Price levels and sales volume

2) building permits
Increase in permits = expected increase in construction and supply

3) vacancy rates
High vacancy = tenants market
Low vacancy = Landlord Market
Formula: vacancy rate = vacant unit/total unit

Question 15

Seller’s Market

Answer 15

Market conditions in which the number of properties for sale don’t meet the demand

Properties tend to sell quickly and at higher prices

Question 16

Buyer’s market

Answer 16

Market that has fewer buyers than supply of homes for sale

Price & negotiation more favorable to buyer

Question 17

Broad Market VS. Thin Market

Answer 17

Broad market = one in which many people want to buy & sell, common in the summer (move before school starts)

Thin market = one with few buyers & sellers, common in winter (houses show worse)

NB: it refers to the amount of activity happening at any given time and each market is different

Question 18

Benchmarks to determine buyer, seller or neutral market

Answer 18

Number of months of inventory must be determined
Formula: number of total houses listed/numbers of houses sold

0 to 4 months = sellers market
4 to 6 months = neutral market
6+ months = buyers market